THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.

WOLF BLITZER, HOST: To our viewers, you're in THE SITUATION ROOM. Happening now, President Bush makes his first visit to Saudi Arabia and brings a pricey gift -- a promise to sell $20 billion in very high tech weaponry.

Is that a message to Iran?

If John McCain becomes the Republican frontrunner, will the sharpest attacks come from within his own party?

We're taking a closer look at how Christian Evangelicals might react.

And how Princess Diana's mother reacted to her dating of Muslim men. Shocking testimony coming in right now from the Diana's former butler and confidante.

I'm Wolf Blitzer.

You're in THE SITUATION ROOM.

President Bush places a big bet Saudi Arabia. As the president today made his first visit to the kingdom, his administration announced a massive arms deal, including the latest so-called smart bombs. That would seem to underscore the president's tough talk on Iran.

Let's go to CNN's Brian Todd.

He's watching this story for us -- what's the signal this $20 billion arms deal sends?

BRIAN TODD, CNN CORRESPONDENT: Well, a lot of signals. The one you just mentioned, Wolf, to Iran. But the president is also telling U.S. allies in the region, upgrade your security and confront the real threats from Iran and elsewhere before it's too late.

(BEGIN VIDEOTAPE)

TODD: Symbolically, strategically, the stakes only get higher for the Bush administration in Saudi Arabia. The White House is planning to sell the Saudis $20 billion in weapons, including targeting systems for F-15 fighter planes, radar equipment, light vehicles and...

TODD: Analysts say the JDAMs are the most controversial part of the package because of their offensive capability.

NATHAN HODGE, "JANE'S DEFENSE WEEKLY": JDAM and other precision bombs are precise enough that they can take out that one target, let's say, for instance, a building, a command post, a bunker. You only need one and you can carry, you know, multiple of these weapons on one aircraft.

TODD: A weapon that will upgrade what analysts call one of the best equipped and most effective fighting forces in the Middle East -- behind only Israel in overall strength. But despite Saudi Arabia's close alliance with the United States, Congressional sources tell CNN some lawmakers plan to introduce a resolution opposing this deal. Among the major concerns -- sophisticated weapons falling into the wrong hands and the Saudis' ties with extremist groups.

JON ALTERMAN, CENTER FOR STRATEGIC & INTERNATIONAL STUDIES: People look at the Saudis and they see what the Saudis are doing in terms of supporting groups and dialoguing and supporting an Islamization, and, in some cases, radicalization through the Arab world, through Muslim communities, and say why would we want to support that government?

TODD: Still, some usual officials the defend the Saudis, saying the regime has made great progress in fighting terrorists. And they say the Saudis provide a crucial balance against another threat sited by the president.

GEORGE BUSH, PRESIDENT OF THE UNITED STATES: Iran has actually threatened the security of nations everywhere. So the United States is strengthening our longstanding security commitments with our friends in the Gulf.

(END VIDEO TAPE)

TODD: It is, of course, no coincidence that President Bush speaks of that threat from Iran while he's in the Gulf and that this arms deal is being pushed at the same time. Analysts say the administration's hope is that Iran will see the Saudis' upgraded weapons arsenal and military alliance with the U.S. and roll back some of its ambitions in the region. They also point out if the U.S. didn't sell this to the Saudis, someone else would -- namely, Russia or China -- Wolf.

BLITZER: Or Britain and France, for that matter.

TODD: Right.

BLITZER: They'd love to score a deal like this.

What about the Israelis?

What are they saying about this? TODD: Well, the Israelis, you might think, would balk at this. But we talked to U.S. and Israeli officials about this. They are not balking at this deal. They are in line with the U.S. thinking about the Iranian threat. But Israel also getting some sweetener here -- its own $30 billion deal in U.S. military assistance over 10 years.

BLITZER: Brian Todd reporting for us.

Thank you, Brian.

An American is among the dead in a very bloody terror attack at a luxury hotel in Kabul. The Taliban are claiming responsibility for the assault, which involved a suicide bomber and gunfire. It comes as the Pentagon now planning to boost the U.S. military presence in Afghanistan by deploying thousands of additional Marines.

Let's go live to our senior Pentagon correspondent, Jamie McIntyre.

He broke this story, really, a few days ago -- Jamie, but give us a sense of what's going on right now.

I take it a decision has been made.

JAMIE MCINTYRE, CNN SENIOR PENTAGON CORRESPONDENT: Well, Wolf, the question is that with the U.S. essentially caving in and sending additional American reinforcements to Afghanistan, will it let NATO off the hook or will it allow the U.S. to shame the alliance into delivering on its promises?

(BEGIN VIDEOTAPE)

MCINTYRE (voice-over): The decision to dispatch U.S. reinforcements to Afghanistan comes as the latest Taliban attack against a swanky Kabul hotel frequented by Westerners provides a grim reminder the war is far from won. At least six people, including one American, were killed in a brazen assault by gunmen armed with suicide vests, grenades and AK-47 rifles. The primary target -- believed to be a Norwegian diplomat -- was unhurt.

The prospect of Afghanistan slipping into chaos is what has tipped the scales in favor of what is a tough call for Defense Secretary Robert Gates -- stretching his already over-extended military because other NATO countries have failed to send the troops they promised.

ROBERT GATES, SECRETARY OF DEFENSE: I am concerned about relieving the pressure on our allies to fulfill their commitment. I am concerned about the implications for the force. I also am very concerned that we continue to be successful in Afghanistan and that we continue to keep the Taliban on their back foot.

MCINTYRE: The Pentagon has not yet announced the deployment, but CNN has confirmed that roughly 3,200 Marines are being notified that most will be sent to the front lines in March, to beef up NATO forces in the southern British sector, where the fighting is toughest. That will put U.S. troop levels in Afghanistan at around 30,000 -- the highest in six years of war. But it's that or risk failure.

ADM. MIKE MULLEN, JOINT CHIEFS CHAIRMAN: It's a really tough situation. And, at the same time, we believe that additional forces in Afghanistan -- and particularly back to economy of force -- can have a big impact. So those are kind of the -- it's the mission versus the strain, very specifically.

(END VIDEO TAPE)

MCINTYRE: Wolf, there's a lot of debate within the administration about the wisdom of essentially letting NATO slide on its commitments by sending those 3,000 American enforcements. It has not been an easy decision. As the Joint Chiefs chairman said last week, if the U.S. had those forces readily available, it would have made this decision a lot earlier -- Wolf.

BLITZER: Jamie McIntyre at the Pentagon.

Thanks very much.

And just days after six U.S. troops were killed in a booby- trapped house, Iraqi police say one of their officers was killed and others wounded when explosives ripped through a house they were searching in the northern part of the country. Three other booby- trapped houses also were uncovered. The actions were part of an anti- insurgent operation in provinces north of Baghdad. The U.S. military says troops have killed 60 insurgents and uncovered dozens of weapons caches since the push began last week.

U.S. warships buzzed by Iranian speedboats -- just what happened last week in the Persian Gulf is hotly disputed by both sides. The U.S. military says sailors heard a very ominous threat over their radios.

But could that threat actually have been a hoax?

The voice, I must say, sounded very weird right from the beginning.

Let's go live to our Barbara Starr.

She's been looking into this story and has got some new information -- Barbara, what have you found out?

BARBARA STARR, PENTAGON CORRESPONDENT: Well, Wolf, the blogs have just been full of speculation about what did happen in the Persian Gulf last Sunday between the U.S. Navy and Iran.

But today, we spoke to some of the Navy officials involved in the incident. They have some pretty clear views.

(BEGIN VIDEOTAPE)

STARR (voice-over): A Navy captain involved in last week's incident with Iranian speedboats in the Strait of Hormuz says he's convinced a threatening radio transmission was real and not a heckler. It came over an open channel monitored by all Mariners.

UNIDENTIFIED MALE: I am coming to you.

CAPT. DAVID ADLER, COMMANDER OF USS PORT ROYAL: I just don't believe that it was a heckler. I don't buy that. I heard it and I just -- you know, I don't know who's pushing that around, but I just -- I tell you, it's just -- it's unrealistic.

STARR: The privately published "Navy Times" newspaper first raised the possibility it was a heckler, noting that in recent years, American ships operating in the Middle East have had to contend with a mysterious but profane voice making harassing radio calls.

Adler made clear the Navy was ready to fire, if it came to that.

ADLER: We don't intend for someone to get to shoot us first.

STARR: When it comes to the rules of engagement, the Navy warns there's no magic line in the water -- sail too close and get shot.

ADLER: It's do we believe that was the guy on the radio?

What's his speed?

What's his closure?

How many are in the boats?

How many boats are there?

Did I see a weapon in the boat?

Can I tell if he's on the weapon?

And these are all the things that we're getting from multiple sources in seconds at a time. And so there is no magic anything.

(END VIDEO TAPE)

STARR: Wolf, the U.S. intelligence community is now reviewing the entire incident, as well as three other encounters the U.S. Navy has had with Iranian speedboats in the last six months, trying to determine to what extent Iran is really ratcheting up tensions in the Persian Gulf -- Wolf.

BLITZER: This story is really resonating out there.

When you get more information, Barbara, let us know.

Thanks very much.

Let's go back to Jack Cafferty.

He's got The Cafferty File in New York -- Jack. CAFFERTY: Yes, even if it was a hoax, though, I mean those Navy commanders see those -- those nut cases in those little boats flying around out there, you can't blame them for getting their finger on the triggers. And then the...

BLITZER: A lot of people think they should have fired right away anyhow.

CAFFERTY: Yes. And then they get this thing about "you're going to explode in a minute." Those Iranians are lucky to be alive.

Although the Republican presidential race is still wide open -- it could be anyone's to win -- it looks like John McCain is picking up various serious -- various serious -- very serious mojo. Quite remarkable when you think back to last summer, when a lot of people -- including me -- were convinced it was all over for McCain. I did a whole piece about how he was toast.

An average of three national polls conducted after the New Hampshire primary now show that McCain is on top, with 32 percent. He's followed by Mike Huckabee, 20 percent; Giuliani and Mitt Romney tied at 14 percent; and Fred Thompson is just annoying at this point, as 7 percent.

McCain is also viewed more favorably than any of his major competitors by a new CBS/"New York Times" poll. It shows 57 percent of Republican primary voters, including more than half of conservatives, like McCain. And that's up dramatically from 37 percent just a month ago -- almost double.

Voters give various reasons for jumping on the McCain bandwagon. Some think he's more honest than the other candidates. Others describe him as more moderate and willing to work with the Democrats. Of course, it's important to remember that nothing is set in stone when it comes to the Republican race, often described as a bit of a demolition derby.

If McCain wins Michigan and South Carolina, well, that could cement his frontrunner status. On the other hand, if he loses either of those races, all bets are off and we go back to square one. But for the moment, the political gods are smiling on the 71-year-old McCain.

So the question is this -- why has John McCain's popularity among Republicans suddenly skyrocketed?

Go to CNN.com/caffertyfile, where you can post a comment on my blog -- Wolf, I have one, too.

(LAUGHTER)

BLITZER: I love your blog at CNN.com/caffertyfile.

CAFFERTY: It's a fine blog.

BLITZER: My blog is at CNNPolitics.com.

A lot of people are commenting on my request for help getting ready for debates.

CAFFERTY: Oh you are -- you're soliciting questions, right?

BLITZER: I'm still asking for help, yes, great help.

CAFFERTY: Which means you're not going to have to do any preparation.

BLITZER: I'll do a little preparation...

CAFFERTY: The viewers will provide all the...

BLITZER: ...but the viewers will...

CAFFERTY: ...questions for you.

BLITZER: ...the viewers will help me.

CAFFERTY: OK.

(LAUGHTER)

BLITZER: Thanks. Jack.

Jack Cafferty will be back shortly.

And we're going to have more on John McCain coming up. He may be ahead in the national polls right now, but he also is facing some fierce opposition and some of that opposition coming from members of his own party.

How would Christian conservatives react if McCain becomes the GOP frontrunner?

Might Evangelicals form a third place?

We're looking into this.

Also, the Clinton and Obama campaigns are embroiled in a nasty war of words about race.

Could the two leading Democratic candidates drag each other down?

Roland Martin spoke with Bill Clinton just a little while ago. Roland is standing by to tell us what he heard from the former president.

And how did Princess Diana's mother react to her affair?

Shocking testimony from Diana's butler and confidante.

That and a lot more coming up right here in THE SITUATION ROOM.

(COMMERCIAL BREAK)

BLITZER: Senator John McCain is leading the presidential Republican pack in some national polls after his win in New Hampshire. And while he's strong in Michigan and South Carolina right now, wins there could put him in line for his toughest battles yet.

And joining us now is David Brody.

He's the senior correspondent for the Christian Broadcasting Network.

David, thanks for coming in.

DAVID BRODY, CHRISTIAN BROADCASTING NETWORK: Thanks, Wolf.

BLITZER: You've really got your pulse on what's going on among Evangelical Christians. And you've written a fascinating piece about what happens if McCain wins Michigan and McCain goes on to win South Carolina.

What happens then?

BRODY: Well, there are a couple of things. First of all, a lot of people are possibly calling him the frontrunner. But you're right, Michigan, South Carolina -- he becomes the frontrunner. And at that point, get ready for the ammunition to fly from all of these rival campaigns.

You know, right now, we're hearing a lot of anonymous sourcing of rival campaigns talking about what McCain -- how McCain would be bad for the party. But soon those rival campaigns will no longer be anonymous and they'll be out in front.

Right now, Mitt Romney is doing a lot of the dirty work. But let's think about this for a second. When we get, eventually, to Florida, here comes Rudy Giuliani. And if John McCain has built up steam in South Carolina and Michigan before that, then all of a sudden, John McCain is not only the frontrunner, but he's this, so to speak, "electable frontrunner" -- a moderate frontrunner. Well, this is how -- what Rudy Giuliani has been wanting to do for a long time. There could be a lot of animosity, especially in Florida.

BLITZER: The opposition research comes out directly against John McCain.

Evangelical Christians -- they don't like him, do they?

BRODY: Well, you know, that is not a hot or cold, black or white issue, necessarily. I can tell you that the sources that I have on the ground in South Carolina say it's a four-way split in South Carolina among Evangelicals. I mean some of the polling will indicate that.

But if you go a little deeper, it's not just the Huckabee narrative, necessarily, in South Carolina, or what we've been hearing is the Huckabee/Thompson narrative. John McCain does have a base of support in South Carolina.

And, so, to go back to the agent of intolerance remarks that he said back in 2000 would be to simplify the issue. It's much more complicated than that because he'll go to his 24-year pro-life record. And there's other Evangelicals who see it much broader than that, especially when it comes to the war on terror.

BLITZER: They like him on that.

BRODY: Yes.

BLITZER: You quoted an anonymous senior adviser from a rival Republican campaign as saying: "John McCain is the same candidate Republicans walked away from in 2000. He is still opposed to tax cuts. He still supports campaign finance reform. And he is still wishy-washy on judicial nominees. At some point, Republican primary voters are going to look at one another and say is this really the guy we want to take on Hillary Clinton?"

Give us the subtext.

BRODY: Well, a couple of things. First of all, I think what you're going to see going forward is this idea of judicial nominees especially. You know, John McCain, obviously, involved in this. We're getting a little bit inside the beltway here, in terms of talk, but about the Gang of 14 and how, in essence, he was part of it.

BLITZER: He was a moderate and he wanted to make sure that Democrats and Republicans could work together on judicial nominees and not see the whole process stymied.

BRODY: That's right. Look for these other campaigns to go after him on this judge's issue, because that's going to be part of this idea that he doesn't necessarily play to the base.

Tax cuts, yes. Campaign finance reform is going to be a big issue, as well. But, you know, it's interesting, because Mitt Romney has been kind of doing the public dirty work, expected to go much broader in that, especially as we head to South Carolina, if he wins Michigan.

BLITZER: So correct me if I'm wrong, the bottom line -- there really is no consensus Republican emerging right now among Evangelical Christians, despite the fact that Mike Huckabee himself is a Baptist minister.

BRODY: Well, I think that's overall correct. And I think part of the reason is, is that Mike Huckabee appeals to not just some of the old guard Evangelical, but also some of the new guard. And so, obviously, there is a discussion point among Evangelicals as to, you know, which is the way to go?

What candidate do people support, do Evangelicals support?

Fred Thompson seems to appeal more to the old guard Evangelical.

And, so, yes, there is a discussion going on within Evangelical circles.

Is Huckabee the runaway Evangelical candidate? No. But at the same time, I can tell you what I've seen on the campaign trail is there's no doubt that he's a guy that moves people -- once they hear him speak in person, they leave the room going you know what, I could vote for that guy.

BLITZER: And under any circumstances do you believe there would be a third party Evangelical candidate who would emerge if somebody got the Republican nomination they don't like?

BRODY: I don't see it that way. I don't see it. And I think part of the reason here is because even if it was a John McCain or even if it was a Rudy Giuliani, you have a sect of the Evangelicals that really do believe that national security, 9/11 extremely important, especially in this day and age.

BLITZER: All right.

David Brody, thanks very much for coming in.

BRODY: Thanks, Wolf.

BLITZER: Former President Bill Clinton is taking a new issue with Barack Obama's Iraq War record. The former president talked about it with our own contributor, Roland Martin. Rowland is standing by to join us live.

And will the Paralympics star known as "The Blade Runner" be attempted -- be allowed to compete in the Beijing Olympic Games?

We have new details of the decision.

Stay with us.

You're in THE SITUATION ROOM.

(COMMERCIAL BREAK)

BLITZER: Carol Costello is monitoring some other important stories incoming into THE SITUATION ROOM right now -- Carol, what do you have?

CAROL COSTELLO, CNN CORRESPONDENT: Well, Wolf, there is now a $25,000 reward being offered in the search for a Marine suspected of killing another Marine who was pregnant and had accused him of rape. Billboards going up as part of a nationwide search for Corporal Cesar Laurean. He's wanted in the death of Lance Corporal Maria Lauterbach. Investigators found what they think are the remains of Lauterbach and her fetus over the weekend in a fire pit in Laurean's back yard.

Dozens of people are helping search for more victims of an avalanche near Montana's White Fish Mountain Ski Area. The bodies of two back country skiers were found yesterday. But witnesses insist they saw at least two other people swept up in the avalanche, although no one has been reported missing. Crews are probing snow up to 30 feet deep and littered with downed trees. He's the first Indian-American to lead a U.S. state. Republican Bobby Jindal has been sworn in as Louisiana's governor. In his inaugural speech, he vowed to clean up his state's corrupt image, beginning with a special session of the legislature next month to address the problem. The former congressman is the nation's youngest governor. He is 36 years old.

Sporting officials have ruled that Paralympic Gold Medal runner Oscar Pistorius cannot compete in the summer's Beijing Olympic Games because his prosthetic legs give him an unfair advantage. The 21-year- old South African runs on special shock-absorbing, carbon fiber artificial legs that have earned him the nickname "Blade Runner." But the International Association of Athletics Federations says the limbs give him a: "mechanical advantage."

Back to you -- Wolf.

BLITZER: Thanks very much, Carol, for that.

The Clinton and Obama camps battling over the issue of race. The former president, Bill Clinton, spoke to our contributor, Roland Martin, today. Roland is standing by with details of that interview.

Also, the New York City mayor, Michael Bloomberg, confronting rumors of a possible presidential bid head-on. We have details of what the mayor is now saying.

Plus, has the French president taken his high profile romance to the next level only months after his divorce?

Stay with us.

You're in THE SITUATION ROOM.

(COMMERCIAL BREAK)

BLITZER: To our viewers, you're in THE SITUATION ROOM.

Happening now, Republican presidential candidates are in a tight four-way horse race tie in Florida. A new Quinnipiac University poll of likely primary voters has John McCain at 22 percent, Rudy Giuliani at 20 percent, Mitt Romney and Mike Huckabee both at 19 percent. Tight right now -- that's a snapshot in Florida. The Florida primary for the Republicans coming up at the end of the month.

Democratic candidate John Edwards says his daughter is fine after her car was rear-ended, reportedly by a drunken driver in Chapel Hill, North Carolina. Edwards' son Wade was killed in a car accident back in 1996 when he was 16-years-old.

And a leading French newspaper reporting that the president, Nicolas Sarkozy, has married his Italian girlfriend, Carla Bruni, just months after his divorce. We're watching the story. We're seeing if we can confirm it.

I'm Wolf Blitzer. You're in THE SITUATION ROOM.

Democrats are becoming divided by rhetoric about race. Despite all they might have in common, the Clinton and Obama campaigns are now caught up in an increasingly nasty fight which carries a lot of political risk.

Carol Costello is here.

She's watching the story for us.

How did it all get started -- Carol.

COSTELLO: You know, that's an interesting question, because it's not clear who started it. Some say Hillary Clinton's Martin Luther King/LBJ comment was first picked apart by African-American bloggers and then picked up the Obama camp. Others say Clinton supporters started it long ago with subtle racial jabs.

When all is said and done, though, it's the Democratic Party that may suffer the most.

PROF. JOHN MCWHORTER, UNIV. OF CALIFORNIA, BERKELEY: Part of his appeal is based simply on how he feels, how his language makes you feel. For example, Senator Clinton doesn't happen to have that gift. He does, and it's interesting to watch.

COSTELLO: But sounding inclusive is getting trickier by the minute. Racial overtones have been injected into the democratic campaign and some say it's likely to hurt Obama the most. It's already getting more divisive. Take media executive Bob Johnson's criticism of Obama for questioning Clinton's civil rights credentials.

BOB JOHNSON, FOUNDER, BLACK ENTERTAINMENT TV: As an African- American, I am frankly insulted that the Obama campaign would imply that we are so stupid that we would think Hillary and Bill Clinton, who have been deeply and emotionally involved in black issues when Barack Obama was doing something in the neighborhood that I won't say what he was doing, but he said it in his book.

COSTELLO: Johnson later said he meant community service. While Obama himself remains largely above the fray, his wife does not. She defended her husband against Bill Clinton's fairy tale charge, even though Clinton said he wasn't referring to Obama's candidacy, but to his anti-war stance.

MICHELLE OBAMA, WIFE OF PRESIDENTIAL CANDIDATE: We must do it in the face of those who will attempt to play on those emotions for their own purposes, to discourage us from believing what is possible, to dismiss this moment as an illusion, a fairy tale. COSTELLO: Some warn all of the racial rhetoric must stop for the good of the Democratic Party.

ALVIN THORNTON, ASSOCIATE PROVOST, HOWARD UNIVERSITY: You want the electorate, especially the Democratic Party electorate to be turned off and in fact, turned away for the November election. So Mr. Clinton and Mr. Obama will have to be very careful.

(END VIDEOTAPE)

COSTELLO: Very careful and Dr. Thornton says the democratic chair, Howard Dean, should step in and tell everybody to just stop it. He says the republicans must be cheering.

By coming to the defense of his wife, Bill Clinton wound up at the center of the democrat's dispute about race. Today he said Barack Obama certainly has what it takes to be president, but not compared to Hillary Clinton.

(BEGIN AUDIO TAPE)

BILL CLINTON, FORMER U.S. PRESIDENT: First of all, qualification, the minimum qualification is set by the United States constitution.

ROLAND MARTIN, CNN CONTRIBUTOR: Absolutely.

CLINTON: So, the voters get to decide. I think the most important thing to me is, do I think he's more qualified than Mitt Romney or these republicans running? You bet I do. Do I think it's more likely that she would be a better president because of her unique experiences and how they fit with this moment in history? I do. This is not a question of is he or is he not? It's always relative in politics who has the better case. I think she's got the better case.

(END AUDIO TAPE)

BLITZER: The former president spoke at WVON with our contributor Roland Martin who is joining us now live. Roland, thanks for coming in.

MARTIN: Glad to be here.

BLITZER: What make of this? Because this is really the last issue that I would have thought to this emerge as a major topic of dissension between the Clinton and Obama campaigns.

MARTIN: Again, I think Iowa changed all of that with Obama winning. That means South Carolina becomes even more important. That is the first southern state significant black participation in the democratic primary. Whoever comes out of that is really in a great position on February 5th. Not necessarily just in California, New York, new jersey, but really Virginia, Alabama, Georgia, Tennessee, states with significant African-American voters. That's really what this is about.

BLITZER: I know you've studied this closely. Who is to blame more for injecting this sensitive subject into this contest right now?

MARTIN: You know what; it's one of those things where you say who through the first punch? And so always it's the person who gets the second punch in the NFL when they throw the flag. It really did start in terms of these sort of little jabs with the Shaheen comment, Bill Shaheen when he referenced that republicans are going to say was Senator Barack Obama, a drug dealer. A lot of African-Americans were offended by that comment because here was a candidate who was being very open about it. You had the back and forth. Then you had a comment from New York Attorney General Andrew Cuomo when he talked about this whole shuck and jive. So then, of course, followed by the fairy tale and the MLK deal. So the Clinton people are saying look, the Obama camp, they are pushing this. They're sending memos out with these various talking points. The Obama campaign is saying look, we don't even want to touch race. It is a very fine line, Wolf, as Carol outlined that Obama is trying to walk. I call it the dance, the dance that an African-American has to do running in the mainstream sort of situation. You don't want to be overtly racial. You also have to recognize that African-Americans want you to appeal to them as well in order to get those votes. There's a very delicate balance there.

BLITZER: I know you spoke with Bob Johnson, founder of BET. He sold the company a few years ago. He's a very, very wealthy guy and he's a strong supporter of Hillary Clinton. Tell us about that conversation you had today.

MARTIN: Well, it was a huge little chat we had. He was on the Michael Basin Show in the afternoon, an urban radio show. We got a chance to debate. He defended her. He said look, when I made it my comment I wasn't talking about the whole issue of drugs it was really that he was a community organizer. I said, Bob, I'm sorry. You know I'm not buying that. When you listen to your tone, listen to your inflection, we know what you're talking about. The bottom line is he made it perfectly clear that he is going through the Clintons. Those are folks who he knows them very well. He says he likes Obama that he sponsored a fund-raiser along with former Congressman Bill Gray when Obama first came to Washington, D.C. but he said look, this is what we're going to do. He also said, look, this story is probably going to die out today. I'm not quite sure about that. They are hard feelings there. Certainly you may find Obama in the next 24 to 48 hours really make some kind of statement rising above this whole issue of race. We all thought it was really going on end on Saturday when Clyde Burns said he wasn't going to endorse and so after yesterday with Johnson's comment all the sudden explodes on the scene again and so I wouldn't be surprised if democratic officials say look, enough of this. We have two strong candidates. Why in the world do we want to have a fractious debate right now? We have a opportunity to make history. So I'm very surprised the DNC head Howard Dean has not stepped up , assumed leadership and said look, publicly, enough of this. Let's be democrats. Let's focus on the issues. That's the amazing thing, Wolf. We're not talking about education. We're not talking about 1 billion black men in jail. We're not talking about crime. We're not talking about economic development or housing. We're talking about some words, some comments.

BLITZER: There was a lighter moment on the campaign trail. You saw it live here in THE SITUATION ROOM as presidential candidate Barack Obama was asked about the discovery that he's distantly related to a key member of the Bush administration. Look at this clip.

BLITZER: If you would like to watch any of the candidates today you can always go to CNN.com/live to watch their rallies, their events. It's streamed live.

There's growing speculation about an independent white house bid. Now the New York mayor, Michael Bloomberg, addressing the issue head on. You're going to find out what he's saying today.

Plus, a former hostage is reunited with a child she had in captivity, taken from her three years ago.

Stay with us. You're in THE SITUATION ROOM.

(COMMERCIAL BREAK)

BLITZER: New York Mayor Michael Bloomberg is playing down talk of a possible independent run for the white house. It's been fuelled since reports emerged last week that Bloomberg was collecting polling research in advance of a possible campaign launch. Listen to how he's now responding to that issue.

(BEGIN VIDEO CLIP)

MAYOR MICHAEL BLOOMBERG (I), NEW YORK: I am not a candidate for presidency of the United States. I am trying to speak out, and I will continue to do that. I feel very strongly the world that is going to be left for my children or for me when I get older is being dictated by people who are running for office today. And I would like them all on both sides of the isle to speak out and say with more specificity how they would approach the big problems that we're facing, whether they're problems internationally or problems domestically.

(END VIDEO CLIP)

BLITZER: Notice he's saying I'm not a candidate, meaning he's not a candidate right now. And he isn't a candidate right now. But it leaves open the possibility he could change his mind in the coming weeks. We're watching that story very closely.

For the republican presidential candidates, the economy is the number one issue with Michigan ahead of tomorrow's primary. Let's go out to Detroit. Our Mary Snow is standing by, watching the story for us.

All right. So what are the republican candidates, and they have a lot at stake in tomorrow's republican primary, Mary, what are they saying?

MARY SNOW, CNN CORRESPONDENT: Well Wolf, they're saying a lot about the auto industry. In fact, we're at the Detroit auto show. The republican candidates are making a point to come here and in a show of support for the auto industry. In fact, just a few minutes ago, republican presidential candidate Mitt Romney and Mike Huckabee were both here at the same time. They did not see each other on the floor here, but they were walking around, visiting with different companies here. But this auto industry has really taken center stage here in Michigan in terms of the campaign trail because it's been so hard hit. The republican candidates are offering different solutions to help out the ailing economy here. We took a look at what they're offering.

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SNOW: The sleek new models showcasing in Detroit are the talk of the town, but it's the struggles of American car makers that are the talk on the campaign trail. It's one of the reasons Michigan has the highest unemployment rate in the country. With widespread fears of a recession, Michigan has forced the economy into the fore front and the candidates to offer solutions.

SEN. JOHN MCCAIN (R), PRESIDENTIAL CANDIDATES: We need to do things right away.

SNOW: Republican presidential hopeful Senator John McCain wants to make President Bush's middle class tax cuts permanent. As for Michigan, McCain says old jobs are gone and the answer now is to retrain workers and invest in new technology. He also thinks cutting government spending will help. Mitt Romney has a different approach.

MITT ROMNEY (R), PRESIDENTIAL CANDIDATE: The pessimists are wrong. The auto industry and all its jobs do not have to be lost.

SNOW: Romney wants a five fold increase in spending on research into new technology and energy sources and a tax cut for anyone making less than $200,000.

Mike Huckabee says for immediate help, gas prices need to come down.

MIKE HUCKABEE (R), PRESIDENTIAL CANDIDATE: We also need to be looking at our oil reserves to try to do everything we can to hold the price of fuel down.

SNOW: Huckabee says breaking America's dependence on foreign oil is key to boosting the economy. In the long run, he wants the so called fair tax cut that would replace income taxes with a national sales tax. While one economist applauds some of the pledges on the campaign trail, he says the time for action is now.

PROF. JOEL SLEMROD, UNIVERSITY OF MICHIGAN: These policies should be happening in 2008 and early in 2008. By 2009, the cycle might be reserved. It will be certainly too little and probably too late.

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SNOW: And, Wolf, the economists we spoke with said that this is also putting republicans in a tough position because they often stress the free markets working themselves out. But as he said, here in Michigan, in Detroit particularly, that's not going to wash because people are really demanding some answers and the need for the government to somehow get involved. Wolf?

BLITZER: All right. Thanks very much, Mary Snow at the auto show in Detroit; a huge, huge issue out there, the economy.

Coming up, we're going to tell you about Princess Diana. You're not going to believe what Princess Diana's mother said about her dating Muslim men. There's shocking testimony coming in today from Diana's butler and confidant.

Stick around. That and a lot more coming up right here in THE SITUATION ROOM.

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BLITZER: In Kenya right now, hundreds of people are dead and communities have simply been devastated. The former United Nations Secretary-General Kofi Annan is headed to Kenya to try to resolve this bloody conflict that has followed a disputed presidential election, but it's a daunting task. CNN's Zain Verjee is in Nairobi -- Zain.

ZAIN VERJEE, CNN CORRESPONDENT: Wolf, Kenyans are going about their ordinary days, but there is an underlying sense of tension here. Mass demonstrations are planned for three days later this week, and much of the country is bracing for violence.

The people on the outskirts of Nairobi in a slum called Kibera have already felt the brutal effects of that violence.

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VERJEE (voice-over): God and politics became a deadly mix in Kenya's Kibera slum. A church looted and burned by an angry mob moments after President Mwai Kibaki was declared the election winner late last month.

Muhammed Doka, a Muslim cobbler who now keeps an eye on the church, takes me through the rubble.

MUHAMMED DOKA, CHURCH MEMBER: We just saw smoke. Pastor's house was burning.

VERJEE: The church pastor is a Kikuyu, the same tribe as President Kibaki. He has fled. His picture is all that's left of his home.

DOKA: A beautiful house like this, just demolished. It's like this, not good, not good at all.

VERJEE: Opposition supporters made their message clear.

DOKA: So many people came from their houses. They were shouting. They were streaming. People were carrying the banners of Raila. They were saying we won't agree. Raila has won.

VERJEE: In the church, only singed Swahili hymns, and a message of hate. "So shall we burn u."

Many churches in Kibera have been set on fire.

(on camera): How many people who are Kikuyu are terrified and gone?

DOKA: For now, it is half the population of Kibera or Karaja. Half of them are already gone.

VERJEE: How many? Number?

DOKA: To me, I think it's about 30 to 40 families.

VERJEE (voice-over): And these children, mostly Kikuyu, depended on the church for care and food. They're now scattered, living in a park, relying on handouts.

UNIDENTIFIED MALE: They had to leave the slums because their houses have been burned.

VERJEE: The children here need food, blankets, clothes and medicine. Their place of worship and shelter now a source of scrap metal.

Amid the ruins of the church, Muhammed tells us he still has faith.

(on camera): A place of peace destroyed in this Nairobi slum. There have been scenes like this all across the country. It's not about God and religion, but about tribe and power.

Zain Verjee, CNN, Nairobi.

(END VIDEOTAPE)

BLITZER: Let's check back with Jack Cafferty. He has got the Cafferty file. Hi, Jack.

JACK CAFFERTY, CNN CORRESPONDENT: Wolf, the question this hour is why is John McCain's popularity among republicans suddenly skyrocketed? He is the top dog in the meat house, as they say.

James writes, "The word is conviction. McCain is running against the love-child of John Kerry and Ronald Reagan (Romney), the Anti- Clinton of Hope Arkansas (Huckabee), and a mayor who needed taxpayer dollars to protect his mistress (Giuliani). McCain lead the charge in advocating the troop surge in Iraq, stuck to his guns when it was considered political suicide. McCain refused to shy away from his stance on immigration because he refuses to pander. After window shopping for a few months, a splintered republican party is realizing that their best bet is the straight talk express."

Pat writes from Warner Robins, Georgia, "McCain's popularity is soaring because he is being John McCain this time around and people respect him now more than ever. He is a candidate with real heart. And this time Bush's cronies aren't out to bring him down."

Mike writes, "The answer is simple. The republicans have figured out the plethora of bigots and hardcore conservative zealots they have to choose from don't have a chance of beating a democrat. Outside of McCain, the democrats could put up a lizard and still win in November against the republican field. The republicans may not like McCain but they know he's the only one that gives them an outside chance of winning."

Don weighs in with, "McCain's surge in popularity in recent weeks comes after months of voter exposure to the buffoons that are his republican competitors. He is the lesser of the republican buffoons, so his popularity is surging by default."

James in Olathe, Kansas, "As an independent, while I don't like all of McCain's positions, I would vote for him over all the others from both parties. He may well be the only honest person of all those running."

BLITZER: He does have some mojo going right now. We'll see how it lasts. All right. Jack, thanks very much.

Princess Diana blasted and cursed by her mother for dating Muslims. Intimate new details of her private life are revealed at the inquest into her death.

Stay with us. Lots more coming up right here in THE SITUATION ROOM.

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BLITZER: Here's a look at some Hot Shots coming in from our friends over at the Associated Press, pictures likely to be in your newspapers tomorrow.

In India, a man sits among colorful masks while he waits for a tribal dance performance. In Iraq, a boy screams during a festival. The festival commemorated the martyred of Mohammed's grandson who was killed in 680 A.D.

In news around the world, shocking details revealed by a star witness at the inquest into Princess Diana's death. Her former butler contradicted other witnesses and detailed Diana's tense relationship with her mother. CNN's Adrian Finighan is in London.

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ADRIAN FINIGHAN, CNN CORRESPONDENT: The man princess Diana called her rock, her former butler, Paul Burrell, got his date in court and revealed intimate details of the princess's private life.

Burrell said Diana's soul mate, the man she loved more than any other was not Dodi al Fayed but was a heart specialist, Hasnat Khan. "It was a very deep spiritual relationship," Burrell testified. He says, the relationship was so serious, Diana asked him to approach a local priest about arranging a private wedding. The relationship ended a few weeks before Diana met Dodi but Burrell believes she still held a candle for Khan. Burrell told the inquest, Diana asked him to listen in on a telephone call with her mother, Frances Shand Kydd. He said her mother called the princess, "a whore" for "messing around with f-ing Muslim men." Mrs. Shand Kydd has since died.

Burrell testified that after Princess Diana's death, he met privately with Queen Elizabeth. He says the queen told him to be careful as there are powers at work in this country. Burrell says he saw nothing sinister in the remarks. "I think it was a general be careful warning over many issues." Throughout hours of testimony, Burrell told the jury he thought it highly unlikely that Prince Charles and the royal family would have been involved in any plots to kill Diana. Dodi al Fayed's father Mohammed has always insisted the princess was murdered because she planned to marry his son.

Paul Burrell was billed as the star witness and he didn't disappoint and even claimed in court that a mystery royal had warned Diana that her conversations might have been bugged.

(END VIDEOTAPE)

Being the keeper of so many of the princess's secrets and confidences, Burrell says he'd like to keep it that way but the coroner has dispatched into his home in northern England to retrieve correspondence from the princess. It's almost certain we haven't seen the last of Paul Burrell.

Adrian Finighan, CNN, the Royal Courts of Justice in London. BLITZER: And we're going to stay on top of this story for all of you. We'll be bringing you more details as they unfold.

And to our viewers, you're in THE SITUATION ROOM.

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